Abbott government plans pre-poll tax cuts to woo voters

Tony Abbott is planning to announce a generous package of income tax cuts in the lead-up to the 2016 election in a bid to offset the pain of his austerity budget and win back disaffected voters.

But any personal savings would not show up in pay packets until after the election, unless the economy surprises everyone by wiping away a forecast $10.6 billion deficit when the election falls due in the third quarter of 2016. The prospect of tax sweeteners offers a potential lifeline for marginal seat MPs in the Coalition party room, following a voter backlash to a budget that has made life harder for many households.

The move to cut income taxes a year ahead of schedule represents the second half of a staged political strategy designed to give voters a ''pay-day'' for the sacrifice of spending cuts and tax increases in education, health, petrol, and income taxes for the rich.

Government sources say the cuts - probably to take effect from July 1, 2017 - would come earlier than those factored in to the budget papers from 2018-19 as part of a commitment to keep tax as a proportion of the economy to a maximum ''cap'' of 23.9 per cent. A senior government figure said the Prime Minister and Treasurer knew ''full well'' their 2014-15 budget would be electorally disastrous among middle and low income voters but had taken tougher action now deliberately to free up capacity for pre-election tax cuts. ''The election's still two years away and that's clearly the plan,'' confirmed one senior MP.

Another noted that the natural process of bracket creep, also known as fiscal drag, which gradually shifts people on to higher marginal rates through rising nominal wages, means tax cuts are needed periodically or the proportion of tax to gross domestic product rises too high.

Mr Abbott has stopped short of promising tax cuts this term or next with a view to gaining the maximum announcement value from voters by doing it closer to the election.

But he has dropped some hints, saying earlier this month: ''I would like to be in a position to offer tax cuts in our next term … The whole point of getting the budget under control now is so that we can give tax cuts in the not-too-distant future.'' Mr Hockey has also made hints, signalling the need specifically in his official budget speech in Parliament.

''Over the next 10 years we will reduce our expected debt by nearly $300 billion from $667 billion to $389 billion, and that is after we prudently budget for future taxation relief,'' he said.

Economists say the delivery of cuts would be extremely expensive. BT chief economist Chris Caton said one option that might be under consideration was to provide income tax cuts in a way that was ''close to revenue neutral'' by cutting direct taxes while agreeing with the states to lift the GST rate.